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What are the Different Types of Day Trading Signals?

Dana DeCecco
Dana DeCecco

Day trading signals are an integral part of a system most suited to a specific style of trading. Trading signals are necessary to determine trade entry and exit strategies. The first consideration is to find or develop a system specifically designed for the asset being traded. The time frame being traded also must be considered; day trading signals created for scalping ticks might not be suitable for a swing trade using five-minute charts.

The various day trading systems require a means to provide entry and exit signals. These trading signals can be created from many sources. Some traders use indicators to provide the signals. Chart patterns are another popular alternative. News and economic announcements can also be traded. Some day traders believe that price action alone provides the best day trading signals.

Businessman with a briefcase
Businessman with a briefcase

The trader must be intimately familiar with the asset being traded to create good day trading signals. Trading an equity index is not the same as trading a currency pair or a commodity. All markets are not created equal, and all markets do not respond in the same way to the same signals. The jack-of-all-trades approach does not apply to day trading. Specialized trading requires specialized signals.

Time frame selection must be carefully considered before creating trade signals. Scalping tick charts demands a concentrated and focused trader. Swing trading five-minute charts is less demanding in this area but more demanding in patience because more time might be required for the trade to develop. Longer time frames might correspond with larger losses, and scalping might correspond with a larger volume of losses.

Signal development is a time-consuming and painstaking process of trial and error. Back testing and forward testing require advanced programs, historical data and accurate tick data. Purchasing buy and sell signals might save development time. Developing a system with entry and exit signals provides a deep insight into how and why a system works.

Even the best day trading signals will usually not be effective under varying market conditions. Some systems might be effective in a trending market but not do so well in a trading range. A system developed for the five-minute time frame might not work at all in the three-minute time frame.

If day trading signals are purchased, the trader should be very familiar with the inner workings of the system. The trader should know exactly what market conditions are favorable for the system. The system should be employed only under those specific conditions. The best day trading signals are only as good as the trader using them.

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